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Weekly Financial Report
With Scott Roulston of Fairport Asset Management
Friday, May 31, 2002
Scott Roulston, CEO of Fairport Asset Management, discusses
the financial woes of media giant Adelphia, the efforts in Columbus to
resolve the State budget crisis, and the marketing by Charles Schwab of
the compensation model for its brokers that contrasts sharply with other
brokers now under investigation by Congress and the SEC.
April Baer - It's been a rocky week for the financial
markets. The DOW blue chip index has posted four straight daily losses.
Tech stocks eked out a small gain yesterday after three straight losses.
But now we're hearing some rumblings that Adelphia (the cable giant) may
be headed for bankruptcy, amid some allegations of possible improprieties
involving highly placed company officials. The NASDAQ is threatening to
remove Adelphia from its prestigious stock listings. Here to help us make
sense of this and other developments of the week is Scott Roulston of
Fairport Asset Management. Good morning, Scott.
Scott Roulston - Good morning, April. That was
an interesting story. Why is it when I'm stranded on business trips, I
don't end up at an airport with a disco in it?
April Baer - I know. Doesn't that sound like something
you'd like to have around? I'd like to find one with a gym. Maybe the
Hopkins developers can work out something like that. I wanted to ask you
about some information I saw about the Adelphia story. Now yesterday Adelphia
pledged not to sell its assets before it has a big board meeting on Saturday.
What's going on with Adelphia? This is the sixth largest cable company
and Cleveland's cable provider, we should mention. Do you - can you give
us a run down on what's going on with that company?
Scott Roulston - Whenever a company is facing potential
bankruptcy, there are a lot of issues relative to sales of an asset. So
if they're thinking about selling a franchise (such as the Cleveland franchise)
and they cut a deal with someone (and there are some folks like Apollo
and Blackstone Group and Paul Allen, who is one of the founders of Microsoft,
who are interested in some of these Adelphia properties), then those folks
are going to be reluctant to cut a deal with Adelphia because if the company
then goes into bankruptcy, the deal is off. So Adelphia has a lot of big
problems. - the small matter of $2.3 billion in loans to management's
family, being at the top of the list.
April Baer - Right. Just to recap, the Chief Executive,
John Rigas, resigned his post and seat on the Board after word of some
of these loans to him and his family started coming out. Here we are again,
looking at high-placed company officials getting loans from their company's
board. Aren't there supposed to be some controls in place about this?
Scott Roulston - Absolutely. But you have again
a case of all the management cronies and the board positions (in this
case there were three or four family members, there were friends of family
members, all sorts of conflicts and insider dealings) so, clearly, this
is a case where corporate governance failed.
April Baer - Scott, the Governor is supposed to
sign the State's budget fix plan today. This is something that the legislature
has been working on for weeks. It's very large and very complicated, but
let's talk about just one aspect of it. Some of the bill's critics have
suggested that the State's bond rating is going to be jeopardized by this
spending plan because it doesn't do anything like raise taxes or enact
anything else that might actually raise revenues. It's mostly a budget-cutting
plan. Do you think that the bond rating could be in jeopardy?
Scott Roulston - Near term, I don't think so April.
But the way this thing is going is really puzzling. I'm not a political
expert but the Republicans seem to be in a real awkward position of increasing
spending and taxes or not cutting spending and having some increases in
taxes - the cigarette tax and so forth. They are leaving the door open
to some even bigger issues down the line. I think I heard Jim Trakas earlier
in the week on your station say that they are assuming there is going
to be a 5% growth in Ohio's economy. I don't know what economist they're
talking to, but I don't think the economy is growing in Ohio by 5% this
year. So, down the line there is going to be even bigger issues. So I
would be concerned down the line about the State's bond rating - longer
term, rather than short term.
April Baer - One note on the ongoing fallout on
the Merrill Lynch investigation. This week, Charles Schwab announced a
new kind of computer ranking system to serve its customers. Its brokers
are going to work on a slightly different system than other big houses
do. Can you explain the difference between what Schwab is proposing and
the way this usually works?
Scott Roulston - Schwab has a completely different
business model than other brokerage firms. They are right now the largest
discount broker in terms of assets, but their people do not (the people
who work in the Schwab branches) don't make their money on commissions.
So it's a different model. They are now going after the larger investor.
It's kind of like Toyota adding the Lexus line of cars several years ago.
And part of that strategy is promoting the fact that their people aren't
paid on commission in this new stock rating system. So every time there
is an article about some stock analyst having conflicts of interest, it
really helps Schwab's case. I think there's some risk in this for Schwab,
but it's a real interesting model. And they are doing it a different way
than any of the other brokerage firms on Wall Street.
April Baer - Well Scott, I hope you don't stay
stranded at that airport too long. Have a good weekend.
Scott Roulston - You, too.
April Baer - Scott Roulston of Fairport Asset Management
joins us on Fridays; either from his home in this town or from parts elsewhere.
You're listening to news on 90.3, WCPN.
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